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GBP/USD ripe for 1.45

1.45 is a very specific target for GBP/USD. However, it’s a significant target as that’s where the Pound was before the Brexit referendum. Now the Brexit deal is done, what will push it back to that level again?

GBP/USD - 1.45?

GBP/USD catalyst halfway there

It is clear that the damage that the Coronavirus has done continues to weigh on the pound. With lockdowns in the UK holding through Christmas and New Years, and continuing into the new year, optimism in the UK economy is at an all-time low.

UK Covid cases dropped by 25%

However, with daily Coronavirus cases dropping 25% from the last week, there is some signs of the UK pulling out of their current situation. With that said, hospital beds are still near the brink of overcapacity, alongside deaths continuing to record over a thousand deaths a day.

GBP/USD now focused on the UK economy

Another factor weighing on the cable is the forward-looking guidance the Bank of England gives on interest rates. Specifically, whether they will bring the rate into negative territory.

However, after Governor Bailey’s speech earlier this week, the market has pushed back on hopes that the current interest rate of 0.1% going into negative territory. However, analysts predict a rate cut from 0.1% as soon as next month. Goldman Sachs strategists predict that there could be a rate move to 0% soon, placing those odds at 4 to 1.

Valentin Marinov, head of Group-of-10 FX research and strategy at Credit Agricole SA stated that “The pound is regaining ground as rates markets are pairing back rate cut bets ahead of the February policy meeting..”. However, he also added that “any rebounds in the GBP represent a selling opportunity at current levels.”

The catalyst for the Pound is relatively clear: A dire Coronavirus situation getting much, much better alongside interest rates holding steady.

What are your predictions for the pound?

Cable volatile on UK GDP results and Brexit

The cable experienced wild swings as Brexit, and its economy weighed slammed traders and investors into a volatile session.

GBP/USD experiencing wild swings

GBP/USD fluctuated from the lower bound of 1.28 to the upper bound of 1.29 in a matter of hours as the market took in information regarding Brexit and the UK's GDP figures.

The Internal Market Bill passed by the UK government to override a specific part of the EU withdrawal agreement has come back to light. The European Union has now filed legal proceedings after the UK decided not to withdraw the Internal Market Bill, on the basis that the legislation breaches international law. This is after the deadline to withdraw the bill on Wednesday passed.

Cable swinging on Brexit woes

The UK government has admitted that it knew the law would breach international law in a "very specific and limited way." The UK intends to use this legislation as a game theory hedge if the UK and the EU go through a no-deal Brexit. The original Brexit negotiations had a deadline for the October 15th. However, fundamental differences in key Brexit points remain balanced, alongside the Internal Market Bill not being withdrawn, which may risk a default no-deal Brexit if the deadline is not extended.

Cable struggling on the weakness of the UK economy

Alongside further Brexit woes, official figures showed that the UK's GDP contracted 19.8% in the second quarter. A deep contraction, however, better than the market estimate of 20.4%. The Chief Economist at the Bank of England, Andy Haldane, mentioned that the "contagious pessimism" in the UK was weighing down the economic recovery. Furthermore, with the resurgence of the Coronavirus in the UK, forcing Prime Minister Boris Johnson to enact restrictions on citizens, Haldane expects unemployment to rise to around 7.5%. It is important to note that figure is on the lower bound of the central banks' estimate. It considers the government's new job support scheme, which splits the loss of wages evenly between the worker, employer, and government.

Expect more volatility, especially in the cable, as we approach elections and debates in the United States. Trade safe!

Will GBPUSD shoot past 1.35?

The pound against the US Dollar has returned 11.4% since its March lows. As well all know, a lot has happened since March. But what has not come to fruition is the Brexit talks. As the transition deadline for the UK to leave the EU approaches, Brexit talks have suddenly come back into the spotlight. However, Prime Minister Boris Johnson has thrown a wrench in the Brexit negotiations, threatening to break international law by passing local legislation to override certain parts of the Brexit deal.

GBP/USD

The pound has been extremely volatile to these negotiations and developments with the Coronavirus. Yesterday, the Bank of England held interest rates at 0.1%, alongside stating that they explored how negative rates might be implemented. The pound dropped 0.6% against the US dollar, touching 1.28663. Petr Krapta, currency strategist at ING, stated that “they were exploring how negative bank rates could be implemented effectively, should the outlook for inflation and output warrant it at some point.

JP Morgan analysts weren’t too excited by the BoE’s announcement, stating that “there was little to be gained from taking action today” and that “should it need to react at a later date, the Bank will benefit from a little extra firepower left at its disposal having not wasted it today”

What will push the pound past 1.35

Brexit – or what doesn’t happen with Brexit. Currently, the EU has given the government until the end of the month to scrap the law they had proposed, or face legal action. Furthermore, they have till December to exit the EU properly as their transition period ends. These two factors have pushed the price of betting against the pound has skyrocketed. Therefore, being bullish on the pound has become cheap. Positive sentiment regarding a softer Brexit and progress on negotiations should push the pound higher.

Second factor: Of course, the Coronavirus. If the pandemic levels off, and economic damage is not as bad as it seems, the BoE may not implement negative rates and may push the pound higher.

Currently, the markets have not priced in the effect of negative rates. However, that may change as we get closer to crucial Brexit deadlines.

Pound rallies on weakening dollar

GBP/USD broke 1.30 today, a critical resistance that signals a strong bullish sentiment on the Pound as the dollar weakened on the Fed, sending full message support. Jerome Powell stated that they would keep all support lines open, including bond-buying, low-interest rates, and central bank dollar swaps. Jerome Powell emphasized, “[the fed] is not thinking about thinking about thinking about raising rates.” Andrew Slimmon, Senior Portfolio Manager at Morgan Stanley, stated that the “Fed would keep supporting risk assets.”, suggesting that it would be an excellent time to be long in risk assets.

The rally in the pound comes when the UK still has a 7-day average Coronavirus case figure of around 737, with cases continuing to rise. This number is 26% more since 16th July. On Thursday, there were 846 new Coronavirus cases, the highest since 28th June. This conveys the UK is not fully controlled the Coronavirus.

Boris also faces the issue of Brexit, with a transition deadline expiring on 31st December. The pandemic has made this difficult, dragging the Brexit negotiations on for five years now. The pounds’ strength amidst all the UK’s facing problems shows the strong sentiment of the dollar weakening.

The Euro also rallied against the USD on the weakening of the dollar. Like the Pound, it broke a strong key technical resistance of 1.18. However, like the UK, the continent is experiencing spikes in Coronavirus cases in Spain and Germany. Spain received the largest rise in daily cases since June, booking over 1,200 infections. Similarly, in Germany, sees 902 new Coronavirus cases, up from 684 just a day ago.

The rally in the Euro comes on the back of many tailwinds, such as 750 Billion Euro package and relatively successful handling of the Coronavirus across Europe.

Anish Lal did some excellent technical analysis on the GBP/USD. You can watch it here.